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Focus
THE EUROPEAN MONETARY
UNION
With the start of the year 1999 the European Monetary Union went into effect with its central institution,
the European Central Bank, and its single currency, the euro. After more than a year in existence, the euro
has depreciated by more than 17% against the US dollar. In some quarters this has raised questions about
the wisdom of a common monetary system for Europe; more generally it has led to concerns about the
policies of the European Central Bank, and about the international role of the Euro.
The following contributions address these concerns. The editor is grateful to the authors for their generous permission to make them the focus of the second edition of CESifo Forum.
1998). This consensus is built on the belief that both
inflation and deflation are costly in terms of general economic welfare and performance. Among others, Barro (1997) provides macroeconomic evidence
to this effect. In large samples of cross-country data,
he has demonstrated a negative relationship
between inflation and economic growth.
THE MONETARY POLICY OF
THE EUROPEAN CENTRAL
BANK:
STRATEGY AND IMPLEMENTATION
OTMAR ISSING*
Explanations of this macroeconomic evidence are
based on the view that inflation introduces or exacerbates distortions in the real economy. High rates
of inflation are typically associated with greater
volatility of inflation and the price level. This
volatility distorts the relative price signals on
which the market mechanism relies and raises the
inflation risk premium in long-term real interest
rates. Both phenomena may result in a misallocation of real resources, which is prejudicial to
growth performance (ECB, 1999a). High rates of
inflation may also distort money holdings
(Friedman, 1956) and exacerbate the distortions
introduced into economic allocation by the deadweight losses associated with tax and welfare systems (Feldstein, 1995). Furthermore, unexpected
movements in prices associated with high and variable inflation may result in large and arbitrary redistributions of wealth between creditors and
debtors, inter alia. Such arbitrary redistribution
may threaten social and political instability if property rights are perceived to have been violated.
O
n 1 January 1999, responsibility for monetary policy in eleven of the Member States
of the European Union (EU) passed from their
respective national central banks (NCBs) to the
Governing Council of the European Central Bank
(ECB).1 This marked a fundamental change in the
political and economic environment, as responsibility for a key instrument of macroeconomic policy passed into the hands of an independent supranational authority. This article describes the framework for monetary policy in this new environment
and, in the context of this framework, describes the
implementation of monetary policy in 1999.
The benefits of price stability and implications for
monetary policy
A broad consensus has emerged over recent
decades that the appropriate objective of monetary
policy is the maintenance of price stability (Blinder,
Inflation leads to a
misallocation of
resources
The institutional framework for the single monetary policy, described in the Treaty establishing the
European Community, reflects these economic
principles. First and foremost, the Treaty clarifies
the objective of the single monetary policy and the
Eurosystem. Article 105 of the Treaty states: “The
* Professor Otmar Issing is a member of the Executive Board of
the European Central Bank. The author is grateful to Huw Pill for
his valuable contribution.
1 The Governing Council consists of the eleven NCB Governors of
the countries that adopted the euro in January 1999, plus the six
members of the ECB’s Executive Board. The geographical area
defined by the countries that adopted the euro is called the euro
area. Collectively, the ECB and the NCBs of these eleven countries
are labelled the Eurosystem.
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CESifo Forum
Focus
primary objective of the [Eurosystem] shall be to
maintain price stability.” The Treaty therefore
establishes a clear hierarchy of objectives for the
single monetary policy, with price stability unambiguously assigned overriding importance.
parency and accountability in monetary policy
making. The Treaty imposes stringent requirements
on the Eurosystem in this regard, which exceed
those required of most other central banks in the
world. As is described in greater detail by Issing
(1999), the ECB has committed itself to exceeding
even these stringent requirements. Foremost
among the vehicles used for communication with
the public is the President’s introductory statement
at the regular monthly press conference. This statement provides unparalleled timeliness and openness regarding policy decisions and their rationale.
The introductory statement is complemented by
the publication of a Monthly Bulletin, the Annual
Report and regular appearances by members of
the Executive Board before the competent committees of the European Parliament.
Furthermore, recognising that monetary policy
does not operate in a vacuum, the Treaty also
requires the Eurosystem – insofar as this does not
prejudice the primary objective of price stability to
“support the general economic policies in the
Community with a view to contributing to the objectives of the Community laid down in Article 2”. The
objectives of the Community include, inter alia,
“sustainable and non-inflationary growth” and “a
high level of employment”.
In the long run,
there is no trade-off
between inflation
and growth
The scope for monetary policy to pursue “growth”
or “a high level of employment” is limited. The
seminal contribution of Friedman (1968) re-established the principle that monetary expansions are
neutral in the long run. Other than by maintaining
price stability and thereby reaping its benefits in
terms of economic performance discussed above
(as Friedman (1977) discussed in his Nobel lecture), there is no trade-off at longer horizons
between inflation, on the one hand, and economic
growth or employment, on the other, that can be
exploited by monetary policy makers. The best
contribution that monetary policy can make to the
fulfilment of the Community’s broader economic
and social objectives is to maintain price stability
in a credible and lasting manner, thereby securing
its benefits and providing an environment in which
the private sector and other policy authorities can
operate most effectively and efficiently.
The Eurosystem’s monetary policy strategy
In October 1998 the Governing Council of the ECB
announced the Eurosystem’s stability-oriented monetary policy strategy. The strategy consists of a quantitative definition of the primary objective of monetary policy and “two pillars” that are used to assess
risks to future price stability, namely a prominent
role for money and a broadly based assessment that
encompasses a wide range of indicator variables.
The quantitative definition of price stability
To quantify its primary objective given by the Treaty
more precisely, the Governing Council announced
the following definition: “price stability shall be
defined as a year-on-year increase in the Harmonised
Index of Consumer Prices (HICP) for the euro area
of below 2%”. Price stability according to this definition “is to be maintained over the medium term”
(ECB, 1999b). The Eurosystem’s published definition of price stability gives guidance to expectations
of future price developments, helping to build up
the credibility of the new strategy. Moreover, this
definition provides a yardstick against which the
public can hold the Eurosystem accountable.
Given the potential risk of political intervention in
the design and implementation of the single monetary policy (reflected in the time inconsistency literature, e.g. Barro and Gordon (1983)), the Treaty also
made the ECB and the NCBs independent of national governments and political interference. This institutional independence allows the Eurosystem to pursue its primary objective in an appropriate mediumterm framework and thereby significantly enhances
the credibility of monetary policy. In fact, because the
independence of the Eurosystem is guaranteed by an
international treaty, it can claim to be among the
most independent central banks in the world.
The phrase “below 2%” clearly delineates the
upper bound for the rate of measured inflation in
the HICP which is consistent with price stability.
At the same time, the use of the word “increase” in
the definition clearly signals that deflation, i.e. prolonged declines in the level of the HICP index,
would not be deemed consistent with price stabili-
In a democratic society, institutional independence
of the central bank must be balanced by trans-
CESifo Forum
4
Focus
ty. Moreover, the definition identifies a specific
price index to be used in the assessment of whether
price stability has been maintained. This index is
harmonised across the various countries in the
euro area and its use is consistent with the public’s
usual focus on consumer prices. This focus is obviously on the HICP for the euro area, since monetary policy decisions are based on an assessment of
developments in the euro area as a whole.
academic literature with – when it is properly
interpreted – Friedman’s (1956) famous assertion
that “inflation is always and everywhere a monetary phenomenon”. This points to ensuring that
monetary aggregates are thoroughly incorporated
into the Eurosystem’s strategy. The Governing
Council therefore assigns a prominent role to
money within the strategy. Money constitutes a
natural “nominal anchor” for monetary policy aiming at the maintenance of price stability.
The absence of an explicit numerical lower bound to
the published definition of price stability reflects, in
a transparent and honest manner, the uncertainties
faced by the Eurosystem regarding the potential
existence and unknown magnitude of so-called
“measurement bias” (e.g. Boskin, 1996) in the HICP
at the outset of Stage Three. Because the HICP is a
new concept and long runs of back data do not exist,
estimates of the HICP measurement bias are preliminary and inconclusive. The absence of an explicit lower bound should not be viewed as suggesting
that the Eurosystem is indifferent to deflation. In
practice, a “grey zone” exists – as expected inflation
falls towards zero, the Eurosystem becomes increasingly concerned about the development. At the
upper bound, in order to ensure that price stability
is maintained according to the Eurosystem’s definition in the face of the inevitable shocks to price
developments, policy makers need to ensure that
inflation is normally likely to be safely below 2%.
The prominent role for money – the “first pillar” of
the Eurosystem’s monetary policy strategy –
embodies a commitment to analyse monetary
developments in detail for the information that
they contain about future price developments. To
signal the prominent role assigned to money, the
Governing Council announced a quantitative reference value for monetary growth. The reference
value is intended to help the Governing Council
analyse and present the information contained in
the monetary aggregates in a manner that offers a
coherent and credible guide for monetary policy
aimed at the maintenance of price stability over
the medium term (ECB, 1999c).
Two characteristics of the quantitative reference
value for monetary growth should be emphasised.
First, the reference value is derived in a manner that
is consistent with – and serves the maintenance of –
price stability over the medium term. To ensure this
consistency, money must have a stable relationship
with the euro area price level at this horizon. Second,
substantial or prolonged deviations of monetary
growth from the reference value would, under normal circumstances, signal risks to medium-term price
stability. This feature of the reference value is based
on the evidence that monetary growth is normally a
leading indicator of future developments in the price
level. The available empirical evidence suggests that
broad monetary aggregates exhibit the properties
required for the announcement of a reference value.
Therefore, the Governing Council chose to announce
a reference value for the broad aggregate M3.
The statement that “price stability is to be maintained
over the medium term” reflects the need for monetary
policy to have a medium-term orientation. Furthermore, in response to some types of unforeseen economic disturbance with an impact on the price level
that may threaten price stability, a medium-term orientation of monetary policy is important in order to
permit a gradualist and measured response, which will
not introduce unnecessary and possibly self-sustaining uncertainty into the real economy.
In the context of the Eurosystem’s strategy, interest
rates are set so as to achieve the primary objective
(defined as described above) on the basis of information about the outlook for price developments over
the medium term revealed by analysis undertaken in
the context of the “two pillars” of the strategy.
Money is the
“first pillar” of the
Eurosystem’s
monetary policy
The reference value for monetary growth was
derived using the well-known quantity relationship
between money, on the one hand, and prices, real
GDP and the velocity of circulation, on the other.
Using the Eurosystem’s definition of price stability
and medium-term assumptions for real GDP (trend
growth in the range 2% to 21/2% per annum) and
M3 income velocity (a trend decline of between
The reference value – a prominent role for money
In the light of a large body of empirical and theoretical evidence, there is general agreement in the
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– 1/2% and – 1% per annum), in December 1998 the
Governing Council decided to set its first reference
value for M3 growth at 41/2% per annum. Monetary
developments relative to the reference value are
assessed on the basis of three-month moving averages of the annual growth rates. The reference value
of 41/2% was confirmed in December 1999.
includes an assessment of macroeconomic forecasts
for the euro area, including those produced by the
Eurosystem itself, these should clearly not be seen
as constituting the second pillar in its entirety, still
less a “sufficient” or “summary” statistic of all the
information that policy makers require for taking
appropriate monetary policy decisions. Forecasts
certainly play a role in the monetary policy process,
as one would expect given the forward-looking orientation of the Eurosystem’s strategy. They help to
summarise and synthesise a large quantity of information that may otherwise become too unwieldy to
form a sensible basis for policy discussions.
A broadly based assessment of the outlook for
price developments
Although the monetary data contain information
vital to informed monetary policy-making, on their
own they will not constitute a complete summary of
all the information about the economy required to
set an appropriate monetary policy which maintains
price stability. Therefore, in parallel with the analysis of the monetary data, a broadly based assessment of the outlook for price developments and the
risks to price stability in the euro area – the “second
pillar” – play a major role in the Eurosystem’s strategy. This assessment is made using a wide range of
non-monetary economic indicators.
Assessment of the
outlook for prices is
the “second pillar”
However, forecasts also suffer from a number of
drawbacks. For example, they may quickly become
outdated, since its is difficult for them to incorporate all information in a timely manner. Forecasts
are based on assumptions for certain variables,
such as oil prices or developments in the world
economy, which can quickly become out-of-date.
The final projection is then an incomplete summary of the outlook for price developments.
Furthermore, precisely because they synthesise
information, forecasts can sometimes obscure
information about the individual threats to price
stability on which the appropriate monetary policy
response would normally depend.
This broad range of indicators includes: labour market indicators, such as wages and unit labour costs;
fiscal policy indicators; financial market indicators,
such as asset prices, etc. One important indicator is
the exchange rate of the euro. It should be emphasised that the Eurosystem’s strategy embodies neither an explicit nor an implicit objective for the euro
exchange rate. This does not mean that the euro
exchange rate is treated with neglect. Rather it is
closely monitored and analysed and influences monetary policy decisions insofar as it has implications
for the outlook for price developments in the euro
area. Fluctuations in the exchange rate will affect the
outlook for price developments both directly
(through their impact on import prices) and indirectly (through competitiveness effects and hence
aggregate demand). Consequently, the euro
exchange rate is, in fact, an important indicator within the second pillar of the Eurosystem’s strategy.
The operational framework for the single
monetary policy
The operational framework for monetary policy provides the instruments to guide the level of market
short-term interest rates to the level that the
Governing Council deems best serves the maintenance of price stability (see also ECB, 1998). This
framework fulfils three basic functions. First, it provides instruments that signal clearly the stance of
monetary policy. Second, it ensures that policy makers can steer money market interest rates and contain
their volatility. Finally, the operational framework
provides basic refinancing to the financial system,
ensuring that sufficient liquidity is available. Three
types of monetary policy instruments are available to
the Eurosystem: open market operations, standing
facilities and a minimum reserve system.
As with the reference value for monetary growth,
the broadly based assessment is not intended to
define a quasi-automatic feed-back rule for interest
rate decisions. Rather the second pillar is a framework or process for organising and analysing information, so that policy makers can make an assessment of the appropriate interest rate which will best
serve the maintenance of price stability. Although
analysis under the second pillar of the strategy
CESifo Forum
The major open market operation is the weekly
main refinancing operation (MRO), which takes
the form of a reverse repurchase transaction with a
maturity of two weeks. The main refinancing oper-
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Focus
ation is based on a tender procedure. The tender
may be a fixed rate tender, with counterparties bidding amounts at an interest rate pre-specified by
the ECB (as has been the case during 1999), or a
variable rate tender, where counterparties propose
bids including both amounts and interest rates.
counterparty, the amount of assets provided as collateral is always sufficient.
The ECB also applies a minimum reserve system to
credit institutions in the euro area. This system helps
to stabilise money market interest rates through an
averaging mechanism, whereby the fulfilment of
minimum reserve requirements is based on average
reserve holdings over a month-long maintenance
period (normally ending on the 23rd of the month).
During the maintenance period, averaging allows
banks to absorb liquidity shocks without the need to
use the standing facilities, thereby stabilising interest
rates and reducing the need for frequent fine tuning
operations by the Eurosystem. The minimum reserve
system also increases the demand for central bank
money and thus enlarges the liquidity deficit of the
banking system vis-à-vis the Eurosystem, ensuring
the role of the Eurosystem as a provider of liquidity
to the banking system.
The operational framework also includes a regular
monthly longer-term refinancing operation. This has
a maturity of three months and normally takes the
form of an interest rate tender with a preannounced absolute amount for the allotment. This
ensures the Eurosystem does not signal its monetary policy stance through these operations. The
Eurosystem is also equipped to conduct fine-tuning
operations (through the national central banks of
the euro area or, in exceptional circumstances, centrally) and structural operations (which may take
the form of outright purchases or sales of securities
or the issuance of debt certificates by the ECB).
Reserve requirements are calculated by applying a
reserve ratio of 2% to the deposits, debt securities
and money market paper issued by credit institutions, excluding those instruments with maturity
greater than two years. Although repurchase
agreements are included in the reserve base, they
are subject to a zero reserve ratio. Inter-bank liabilities and liabilities vis-à-vis the Eurosystem are
not subject to reserve requirements. A lump sum
allowance is deducted from the reserve requirements of each individual institution, implying credit institutions with a small reserve base do not have
to hold minimum reserves. Reserve holdings up to
the required reserve level are remunerated at the
marginal rate of the main refinancing operation
(averaged over the maintenance period).
The ECB also operates two overnight standing
facilities, the deposit facility and the marginal lending facility, which are available to all credit institutions at national central banks of the euro area.
The rate of the marginal lending facility constitutes
the upper bound of collateralised overnight money
market rates. The deposit facility is remunerated at
a rate that constitutes the lower bound of
overnight money market rates.
When using the marginal lending facility, or, for that
matter, when entering in liquidity-providing open
market operations in the form of reverse transactions, counterparties have to post assets as collateral. These assets are meant to act as guarantees for
credits received from the Eurosystem. A list of eligible assets has been drawn up for this purpose. Socalled tier one assets have been selected by the ECB
according to uniform criteria and contain marketable paper of high quality. Tier two assets have
been selected by the ECB because they are of particular importance for certain national banking systems in the euro area and promote a certain degree
of continuity at the start of the Monetary Union
with the national operational frameworks that existed prior to the introduction of the euro. Tier two
assets need to meet similar quality standards as tier
one assets. Both tier one and tier two assets may be
used by any credit institution in the euro area, irrespective of its location. A set of risk control measures has been elaborated to ensure that, for any
The operational
framework includes
open-market
operations, a
monthly longer-term
refinancing operation, two overnight
standing facilities,
and a minimum
reserve system
Implementation of monetary policy during 1999
Although the single monetary policy officially came
into force on 1 January 1999, monetary policy coordination was extensive prior to the formal transition to Stage Three. This assessment of monetary
policy implementation therefore starts with the coordinated interest rate reduction by the NCBs in
what is now the euro area on 3 December 1998. This
co-ordinated interest rate cut took note of the
implications for future price developments of the
apparent weakening of economic activity in the
euro area, revealed first by declining industrial confidence and then by the emergence of the first signs
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of a slowdown in industrial production. Turmoil in
financial markets associated with the devaluation
of the Russian rouble in August 1998, at a time
when financial markets were already unsettled by
the Asian financial crisis, spread concerns of a credit crunch. The wealth effects of a potential asset
price collapse and financial instability in the United
States also threatened the global outlook. Against
this background, projections for world output
growth were revised downwards in late 1998, weakening prospective economic growth and inflation in
the euro area. Therefore, at a moment when actual
inflation in the euro area was around 1% and monetary growth and other indicators were in line with
a subdued outlook for price developments, it was
deemed appropriate to reduce the level of key
interest rates in the euro area to a common level of
3% prior to the start of Stage Three.
At the start of Stage
Three, interest rates
were set at 3% on
the main refinancing
operation, 4.5% on
the marginal lending
facility, and 2% on
the deposit facility
by weaker external demand – represented a serious downward risk to price stability.
A monetary policy reaction to these downward
risks to price stability was complicated, however,
by the fact that some indicators appeared to point
in the opposite direction in early 1999. In particular, M3 growth at the start of 1999 was slightly
above the reference value. The January data
showed a significant increase in overnight deposits
which was only partially corrected in February. It
was also notable that credit to the private sector
was growing relatively fast.
The Governing Council was thus faced with a very
difficult situation in early 1999. With respect to
monetary developments it had, however, many reasons not to be too concerned about upside risks to
price stability. Monetary growth was then still close
to the reference value (the three-month average of
the annual growth rates for the period December
1998 to February 1999 was 5.1%). In addition, it
appeared that the changeover to Stage Three had
contributed significantly to the high increase in
overnight deposits in January 1999 and it could not
be ruled out that institutional factors, such as
changes in the statistical reporting systems or in
reserve requirements, had played a role in the rise
in monetary growth in that month. Given the moderation of monetary growth in February 1999, the
Governing Council did not regard monetary developments in early 1999 as implying upward risks to
price stability.
The interest rates on the ECB’s monetary policy
instruments applying at the start of Stage Three
were then officially set on 22 December 1998 and
followed those prevailing at the euro area central
banks at the end of Stage Two. The rate on the
main refinancing operation was set at 3%, the rate
on the marginal lending facility at 4.5%, and that
on the deposit facility at 2%. However, in order to
smooth the transition for the banking sector, the
Governing Council of the ECB set a “narrow corridor” for short-term interest rates during the first
three weeks of January 1999 by setting the interest
rates on the marginal lending facility and the
deposit facility at 3.25% and 2.75% respectively.
On 22 January 1999, these transitional arrangements expired and the marginal lending rate and
the deposit rate were effective at 4.5% and 2.0%.
Against this background, in an environment where
current inflation rates were significantly below the
upper limit of the Eurosystem’s definition of price
stability and in view of downward pressures on
future price developments associated with the current and anticipated weakening of economic activity, the Governing Council decided on 8 April 1999
to reduce the main refinancing rate by 50 basis
points to 2.5%. On the same occasion, the Council
lowered the rate on the marginal lending facility to
3.5% and that on the overnight deposit facility to
1.5%. These moves were regarded by the Council as
appropriate to preserve price stability in the medium term by contributing to improved business confidence and the better exploitation of the growth
potential of the euro area economy.
In the first few months of 1999, signs emerged that
the extent of the slowdown of economic activity in
the euro area was stronger than had been anticipated in December 1998. In line with this, price
pressures continued to be weak. Headline HICP
inflation in December 1998 was only 0.8%, and
remained at that level in January and February
1999. Figures on economic activity that became
available in the first months of 1999 all pointed to
a significant economic slowdown in late 1998. Real
GDP growth had weakened significantly in the last
quarter of 1998; industrial production was also
weakening and business confidence continued to
decline. It thus became increasingly clear that
effects stemming from the slower than projected
growth of the euro area economy – mainly caused
CESifo Forum
Following this move, during the summer of 1999
business sentiment improved and the outlook for
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Focus
real activity recovered in the euro area. At the
same time, the external environment strengthened
as the Asian economies stabilised and then started
to recover, and financial markets stabilised.
Overall, it became progressively more evident that
economic activity in the euro area was set to accelerate significantly in the second part of 1999 and in
the year 2000. Further analysis under the second
pillar also pointed towards a shift towards the
upside in the balance of risks to price stability.
More positive figures coming from confidence
indicators were accompanied by evidence that
industrial production had stabilised in the first
quarter of 1999 and slightly increased in the second
quarter, while data on euro area real GDP indicated that some positive developments had already
occurred in the first quarter of 1999. In addition,
the continued weakening of the effective exchange
rate and the further rises in oil prices were gradually feeding their way through to consumer prices.
currently available information on the outlook for
price stability gives a very positive judgement on
the single monetary policy in the first year.
References
Barro, R.J. (1997). Determinants of economic growth:
A cross-country empirical study, MIT Press.
Barro, R.J. and R. Gordon (1983). “Rules, discretion
and reputation in a model of monetary policy”.
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Blinder, A.S. (1998). Central banking in theory and
practice, MIT Press.
Boskin, M. (1996). Toward a more accurate measure
of the cost of living. Final report to the U.S. Senate
Finance Committee from the Advisory Commission
to Study the Consumer Price Index.
ECB (1998). “The single monetary policy in Stage
Three: General documentation on ESCB monetary
policy instruments and procedures”, Frankfurt am
Main.
ECB (1999a). “Stability-oriented policies and
developments in long-term real interest rates in
the euro area”. ECB Monthly Bulletin, November,
pp. 31–40.
ECB (1999b). “The stability-oriented monetary
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ECB (1999c). “Euro area monetary aggregates and
their role in the Eurosystem’s monetary policy strategy”. ECB Monthly Bulletin, February, pp. 29–46.
Feldstein, M. (1995). “The Costs and Benefits of
Going from Low Inflation to Price Stability” in
eds. C. Romer and D. Romer Reducing inflation:
Motivation and strategy, Chicago University Press.
Friedman, M. (1956). “The quantity theory of
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theory of money, University of Chicago Press.
Friedman, M. (1968). "The role of monetary policy”. American Economic Review, vol. 58, pp. 1–17.
Friedman, M. (1977). “Nobel lecture: Inflation and
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Issing, O. (1999). “The Eurosystem: Transparent
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Studies, vol. 39 (3), pp. 503–19.
With regard to the first pillar of the ECB’s strategy, an upward shift of risks to price stability over
the summer of 1999 was indicated by monetary
developments. Annual M3 growth was on a more
prolonged upward trend in 1999, with the threemonth average of annual growth rates for July to
September 1999 reaching around 6%. Even when
excluding the exceptional developments in January
and February 1999, monetary growth over the summer was significantly above 41/2% when examining
annualised growth rates of seasonally adjusted M3
data at shorter horizons. In parallel, credit to the
private sector continued to expand at a fast rate, of
about 10%. As the balance of risks continued to
move upwards towards the autumn of 1999, on
4 November 1999 the Governing council of the
ECB decided to raise the rate on the main refinancing operations to 3%. On the same occasion,
the rates on the deposit facility and the marginal
lending facilities were raised to 2% and 4% respectively. This level of interest rates was then maintained until the end of 1999.
Concluding remarks
The success of the Eurosystem’s strategy can only
be assessed over the medium term. Given the lags
in monetary policy transmission to the price level,
it is far too early to assess whether monetary policy based on the Eurosystem’s strategy has successfully maintained price stability. Nevertheless, the
9
As the balance of
risks increased, the
ECB raised its
interest rates in late
1999
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